CHAPTER 11 - DEPRECIATION

Question 1

What 2 reasons do we record depreciation for?

Answer 1

1. To account for the loss in value of a fixed asset so we have a realistic value at any point
2. So a proportion of the orginal cost can be set against profits (charged to P&L) for each year of the asset’s useful life

Question 2

Name 4 reasons why assets depreciate

Answer 2

Wear & Tear

Obsolescence

Depletion (coal, oil etc)

Amortisation (ending of a building lease)

Question 3

Explain Straight Line Depreciation and when to use it

Answer 3

An equal amount is charged to the P&L each year as follows

Original Cost - Disposal Value / Life Expectancy

= Annual Depreciation Value

Use when benefits are uniform throughout life of asset (fixtures, fittings, furniture)

(NB Sometimes a fixed annual % is given instead)

Question 4

Explain Reducing Balance Depreciation and when would you use it

Answer 4

A set % is given and applied to the Net Book Value to give the depreciation value for that year

(NB in the first year it’s appied to the original cost)

Used for assets where more benefit is gained in early years before maintenance and repair costs increase (eg a car)

Question 5

When recording depreciation in the final accounts, which 3 records are used and how?

Answer 5

1. P&L - debit the current year depreciation value
2. Provision for Depreciation account - credit the current year depreciation value
3. Balance Sheet - show Original Cost, Accumulated Depreciation and Net Book Value (for each fixed asset)